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Pradipta Chakrabortty sat in a high-end restaurant in Lagos, Nigeria, enjoying a local delicacy recommended by the chef called "grasscutter." He sent a message to his wife, raving about the dish, which had the texture of turkey. She replied with a picture of a rodent. "Luckily, I got the message after I had finished," says the co-lead manager of the
Harding Loevner Frontier Emerging Markets
fund (ticker: HLMOX).

The 42-year-old isn't easily rattled—whether it's learning he just dined on rat, taking off from Sri Lanka's airport 30 minutes before rebels bombed it, or navigating on foot through the streets of Dhaka, Bangladesh, after a political rally made them impassable by car. Chakrabortty chalks up the experiences to just part of the job of searching for stocks in countries that rarely top travelers' itineraries.

It takes a strong stomach to invest in the frontier markets. But Pradipta Chakrabortty has an appetite for growth.
Peter Murphy for Barron's

The rewards for going off the beaten path can be rich. Over the past year, Ghana's market is up 85% and Pakistan's, 67%. The fund Chakrabortty co-manages with Rusty Johnson is up 28%, beating 98% of all emerging-market funds, according to Morningstar.

Frontier markets are a small subset of the emerging markets. There are just four funds that focus on markets in their earliest stages of economic and political development. The largest is the $1.3 billion
Templeton Frontier Markets
fund (TFMAX), now closed to new investors. The other three are a fraction of that size; Harding Loevner is the largest at $174 million. Access to frontier markets can be difficult, and research requires a lot more work than even other emerging markets demand. So, like other frontier funds, Harding Loevner charges a relatively hefty 2.25% expense ratio.

But these markets are home to 30% of the world's population. They're the new emerging markets, in the earliest stages of economic development.

Frontier markets' growth is tied more to local factors, and not as reliant on, say, China's latest economic data point. As a result, they're less correlated to developed and emerging markets. But Chakrabortty says investors need at least a three-year, and preferably a five- to 10-year horizon to ride out the inevitable short-term volatility. Although many frontier markets have improved their fiscal health and built up currency reserves, some are still susceptible to an infusion—or departure—of foreign money funding infrastructure investments and domestic demand. Investors fleeing en masse can create liquidity squeezes, and swift and sharp declines like in 2008 (the fund launched in May of that year, the retail share class came in 2010), when the MSCI Frontier Markets index tumbled about 55%. The fund's five-year average annual loss of 0.82% is a fraction of the 11% annual loss for the index.

Chakrabortty, who grew up outside Kolkata (when it was known as Calcutta), uses some of the same analysis he did in his previous career of running divisions of major multinationals' operations in India, including General Mills' Pillsbury business. Then, as now, assessing a company's competitiveness required gauging its bargaining power with suppliers, customers, and—especially in frontier markets where state intervention can be heavy-handed—with the government.

The fund typically owns 65 to 85 stocks; about a fifth of its assets are currently in oil-rich Persian Gulf countries. As countries like Saudi Arabia and Qatar diversify away from crude oil and gas into refining and services, they are investing heavily in buildings, airports, and educational institutions. That, Chakrabortty says, creates opportunities for firms like petrochemical producer Industries Qatar (IQCD.Qatar). Qatar also has an edge because its raw material—natural gas—is subsidized, creating some of the industry's best margins.

Saudi Arabia has instituted special programs in the wake of the Arab Spring to keep its young population from becoming disaffected. The government, for example, is paying unemployed Saudis a $500 monthly benefit and, through a program called Nitaqat, is requiring private-sector companies to maintain a certain level of Saudis on the payroll. The result: a reduction in unemployment and extra money in consumers' pockets. That bodes well for Jarir Marketing (JARIR.Saudi Arabia), a cross between Barnes & Noble and Best Buy that acts as a family-entertainment hot spot in a country where options are limited. At 17 times 2014 earnings, the stock is relatively cheap versus other emerging-market consumer stocks that trade at about 20. It also boasts an incredible 59% return on equity, a quality Chakrabortty looks for as a sign of strong management in markets where corporate governance can be lax.

Harding Loevner

Frontier Emerging Markets

Total Returns*

1-Yr

3-Yr

5-Yr

HLMOX

28.3%

5.7%

-0.8%

MSCI Frontier Markets

23.0%

2.4%

-11.3%

% of

Top-10 Holdings

Ticker

Portfolio**

Jarir Marketing

JARIR. Saudi Arabia

3.8%

Universal Robina

URC.Philippines

3.8

Engro

ENGRO.Pakistan

3.4

Alicorp

ALI.Peru

3.3

FBN Holdings

FBNH.Nigeria

3.2

Bank Philippines

BPI.Philippines

3.1

Industries Qatar

IQCD.Qatar

3.1

Etihad Etisalat

EEC.Saudi Arabia

2.9

John Keells

JKH.SriLanka

2.8

Qatar Natl Bank

QNBK.Qatar

2.5

Total:

31.9%

*All returns are as of 7/31; three- and five-year returns are annualized. ** As of 6/30. Sources: Harding Loevner; Morningstar

Although Bangladesh ranks as one of the world's poorest countries, its population is bigger than Russia's, and its economy is growing at 6%. Manufacturing is moving to Bangladesh, where textile wages are about a quarter of that in China, says Chakrabortty. "That's a major force lifting its economy," he adds. Generic producer Square Pharmaceuticals (SQUARE.Bangladesh) has benefited from those low labor costs, and the company has twice the market share of its next-biggest rival. Chakrabortty also likes Square's strong balance sheet, a quality that helps companies self-fund and withstand periods of economic instability.

Kenyan farmers typically had few options for the money they reaped during harvest. Many parked it with local retailers. Equity Bank (EQBNK.Kenya) turned the retailers into agents, paying them a fee, and offering farmers a safe place to deposit money that also paid interest. In return, it got a cheap source of deposits it could loan out. "We have beautiful opportunities in Africa that are very innovative because of the infrastructure challenges," Chakrabortty says. "The first movers make good money."

To minimize portfolio risk, Chakrabortty also analyzes each country's big picture, such as its political stability, exchange rates, inflation pressures, and ability to fund itself.

"As long as our investment thesis holds, the idea is to ride out volatility to get to the strong returns," Chakrabortty says. A demeanor unfazed by market gyrations—or rodent dinners—helps.